## Facts

- S.O. and Fannie Bynum owned a 113-acre farm near Tuscaloosa, Alabama, purchased in 1942 after leasing it beginning in 1936.
- They lived on the farm and operated a nursery and landscaping business there, with a substantial portion of the acreage used to grow nursery stock.
- By the late 1950s, the nursery business was financially strained and the farm was heavily mortgaged; the mortgagee pressured them to reduce the debt.
- To generate funds, they subdivided part of the farm into a residential subdivision (“Morayshire Estates”), installed improvements, and marketed lots for sale; the lender was to receive a percentage of each sale.
- In 1960, they sold 12 lots to 9 purchasers for \$40,075 and reported gain of \$28,749.78.
- In 1961, they sold 8 lots to 7 purchasers for \$31,035 and reported gain of \$21,020.45.
- The lots sold were assigned an allocated cost of \$250 per lot for purposes of computing gain.
- They conducted advertising and other sales efforts consistent with an organized subdivision sales program; promotional materials contemplated an overall development of more than 200 lots.
- The taxpayers reported the lot-sale gains as long-term capital gains; the Commissioner recharacterized them as ordinary income.

## Issues

1. Whether gains from sales of subdivided lots in 1960 and 1961 were ordinary income because the lots were held primarily for sale to customers in the ordinary course of a trade or business under I.R.C. § 1221(1).
2. Whether the taxpayers’ subdivision, improvement, marketing, and sales activity constituted a separate real-estate sales business distinct from their nursery and landscaping business.

## Decision

- The Tax Court sustained the Commissioner’s determination that the gains were ordinary income.
- The court found the taxpayers’ subdivision and lot-sale activities were sufficiently extensive to constitute a second trade or business.
- The court held the lots were held “primarily” (principally and of first importance) for sale to customers in the ordinary course of that real-estate business.
- The court denied long-term capital-gain treatment for the 1960 and 1961 lot-sale profits; remaining adjustments were left to computation.

## Legal Principles

- Under I.R.C. § 1221(1), property held by the taxpayer primarily for sale to customers in the ordinary course of a trade or business is excluded from “capital asset” status, making resulting gains ordinary income.
- “Primarily” means principally, and the controlling purpose must be of first importance.
- In determining whether subdivided real estate is held primarily for sale to customers, courts consider factors including the extent and continuity of sales, the degree of development and improvements, marketing and advertising efforts, and whether the activity rises to the level of a trade or business.
- Land originally used in an operating business can lose capital-asset character when placed into an organized development and sales program resembling business inventory.

## Conclusion

The Tax Court treated the Bynums’ subdivided lots as property held principally for sale to customers in an active real-estate sales business created to liquidate land and reduce mortgage pressure, so the resulting gains were taxable as ordinary income rather than long-term capital gains.


Bynum v. Commissioner, 46 T.C. 295 (1966)